November 18, 2010 Koichiro Watanabe President and Representative Director The Dai-ichi Life Insurance Company, Limited Code: 8750 (TSE First section) Disclosure of European Embedded Value as of September 30, 2010 The Dai-ichi Life Insurance Company, Limited (hereinafter Dai-ichi Life ) hereby discloses the European Embedded Value ( EEV ) of Dai-ichi Life and Dai-ichi Frontier Life Insurance Co., Ltd (hereinafter Dai-ichi Frontier Life or DFL ) (collectively, the Group ) as of September 30, 2010. 1
Contents 1. Outline 1-1 About EEV 1-2 EEV Methodology 2. EEV as of September 30, 2010 2-1 EEV Results of the Group 2-1-1 Adjusted Net Worth 2-1-2 Value of In-force Business 2-1-3 Value of New Business 2-2 EEV by Company 3. Movement Analysis 3-1 Movement Analysis of Group EEV 3-2 Movement Analysis by Company 4. Sensitivity Analysis 4-1 Sensitivity Analysis of Group EEV 4-2 Sensitivity Analysis by Company 5. Note on Using EV Appendix A: Appendix B: Appendix C: Appendix D: EEV Methodology Principal EEV Assumptions Actuarial Opinion Glossary 2
1. Outline 1-1 About EEV The EEV Principles and related guidance were published in May 2004 by the CFO Forum, an organization comprising the chief financial officers of Europe's leading life insurers, in order to improve consistency and transparency in EV reporting. In October 2005, further guidance on minimum required disclosures of sensitivities and other items was provided by the CFO Forum. 1-2 EEV Methodology In the calculation of EEV, the Group has adopted a market-consistent approach an approach which values cash flows from both assets and liabilities of a company consistently with comparable financial instruments traded in the market. An increasing number of insurers, mainly in Europe, have implemented similar market-consistent approaches, and in response to such trends, the CFO Forum published the European Insurance CFO Forum Market Consistent Embedded Value Principles 1 (the MCEV Principles ) in June 2008. The use of the MCEV Principles was intended to be mandatory for EV reporting for member insurers with effect from fiscal year 2009. However, in light of recent severe market conditions, the principles were revised in October 2009, and it was decided to defer mandatory MCEV reporting for all members until 2011. Taking into consideration the current situation, the Group has fully adopted the EEV Principles, while also taking into account a market-consistent approach, in calculating its EV. 1 Copyright Stichting CFO Forum Foundation 2008 3
2. EEV as of September 30, 2010 2-1 EEV Results of the Group The EEV of the Group as of September 30, 2010 is as follows: March 31, 2010 September 30, 2010 Increase (Decrease) EEV 2,836.3 2,142.3 (693.9) Adjusted net worth 1,863.5 2,051.6 188.0 Value of in-force business 972.8 90.7 (882.0) Six months ended September 30, 2009 Six months ended September 30, 2010 Increase (Decrease) Year ended March 31, 2010 Value of new business 33.3 47.2 13.8 118.9 (Note 1) The Group EEV is calculated as follows: Dai-ichi Life s EEV plus DFL s EEV attributable to Dai-ichi Life s equity stake in DFL less Dai-ichi Life s carrying amount of equity of DFL. (Note 2) Dai-ichi Life held 90.0% of the shares of DFL as of March 31, 2010 and as of September 30, 2010. (Note 3) Dai-ichi Life s carrying amount of DFL s equity was 163.4 billion as of March 31, 2010 and as of September 30, 2010. 2-1-1 Adjusted Net Worth Adjusted net worth represents the net assets attributed to shareholders and represents the market value of assets in excess of policyholder liabilities, represented by statutory reserves (excluding contingency reserve), and other liabilities (excluding reserve for price fluctuations). In other words, adjusted net worth is calculated by adjusting the total net assets on the balance sheet for the retained earnings in liabilities, general reserve for possible loan losses, unrealized gains/losses in assets/liabilities not accounted for under the mark-to-market methodology, unfunded retirement benefit obligations, and tax effect equivalent of the items above. The breakdown of the Group s adjusted net worth is as follows: 4
March 31, 2010 September 30, Increase 2010 (Decrease) Adjusted net worth 1,863.5 2,051.6 188.0 Total net assets on the balance sheet (Note1) 720.9 693.4 (27.4) Retained earnings in liabilities (Note2) 698.5 715.6 17.0 General reserve for possible loan losses 4.8 5.8 0.9 Unrealized gains (losses) on securities and (Note3) miscellaneous items 1,068.2 1,324.9 256.7 Unrealized gains (losses) on loans 209.3 276.9 67.5 Unrealized gains (losses) on real estate (Note4) 105.0 87.7 (17.3) Unrealized gains (losses) on liabilities (Note5) (19.7) (20.9) (1.2) Unfunded retirement benefit obligation (Note6) (28.5) (24.6) 3.8 Tax effect equivalent of above items (715.6) (832.6) (117.0) Consolidation adjustment (Note7) (163.4) (163.4) 0.0 Minority interest in DFL s adjusted net (Note8) worth (16.2) (11.2) 5.0 (Note 1) The total amount of valuation and translation adjustments and expected disbursements from capital outside the company are excluded. Expected shareholder dividends as of March 31, 2010 is not included in expected disbursements from capital outside the company. Effective the six months ended September 30, 2010, an adjustment regarding the surplus relief reinsurance has been made for DFL s EEV calculation. The effect of the adjustment is ( 46.6) billion. (Note 2) The sum of reserve for price fluctuations, contingency reserve, and the unallocated portion of reserve for policyholder dividends is reported. (Note 3) For purposes of EEV calculations, domestic listed stocks are recorded at their market value as of the end of the reporting period, whereas for accounting purposes under Japanese GAAP, they are recorded on the balance sheet at their average value during the last month of the reporting period. The difference (the value for purposes of EEV calculations less the value recorded on our balance sheet) (after tax) was 85.2 billion as of March 31, 2010, and ( 16.0) billion as of September 30, 2010. (Note 4) With respect to land, the difference between fair value and carrying value before revaluation is posted. (Note 5) The figure represents the unrealized gains (losses) in subordinated debt that Dai-ichi Life issued. (Note 6) The sum of unrecognized gains on plan amendments and unrecognized actuarial differences is reported. (Note 7) Dai-ichi Life s carrying amount of equity of DFL, which is reported in Total net assets on the balance sheet, is deducted to offset. (Note 8) Minority interest in DFL s adjusted net worth is deducted. Effective the six months ended September 30, 2010, an adjustment regarding the surplus relief reinsurance of DFL has been included. The effect of the adjustment is 4.6 billion. (Note 9) All the items from Total net assets on the balance sheet to Tax effect equivalent of above items display the sum of the figures for Dai-ichi Life and DFL. 5
Reconciliations between the Group s adjusted net worth and total net assets are as follows: March 31, 2010 September 30, Increase 2010 (Decrease) Total Net Assets (Note1) 558.7 579.3 20.6 PLUS Retained earnings in liabilities (Note2) 698.5 715.6 17.0 PLUS General reserve for possible loan losses 4.8 5.8 0.9 PLUS Unrealized gains/losses (Note3) 1,345.5 1,608.0 262.5 PLUS Unfunded retirement benefit obligation (Note4) (28.5) (24.6) 3.8 PLUS Tax effect equivalent of above items (715.6) (832.6) (117.0) LESS Book value of businesses not covered 0.0 0.0 0.0 Adjusted net worth 1,863.5 2,051.6 188.0 (Note 1)The total amount of valuation and translation adjustments, minority interest and expected disbursements from capital outside the Group are excluded. Expected shareholder dividends as of March 31, 2010 is not included in expected disbursements from capital outside the company. (Note 2) The sum of reserve for price fluctuations, contingency reserve, and the unallocated portion of reserve for policyholder dividends is reported. (Note 3) The sum of the unrealized gains/losses in securities and miscellaneous items, loans, real estate and liabilities is reported. Due to the consolidation adjustment with regard to consolidated subsidiaries and affiliated companies accounted for under the equity method, unrealized gains/losses on equity within this item is different from the sum of the unrealized gains/losses on equity in Dai-ichi Life and DFL. Effective the six months ended September 30, 2010, an adjustment regarding the surplus relief reinsurance has been made for DFL s EEV calculation. The effect of the adjustment is ( 42.0) billion. (Note 4) The sum of unrecognized gains on plan amendments and unrecognized actuarial differences is reported. 2-1-2 Value of In-force Business The value of in-force business is the amount of (i) certainty equivalent present value of future profits, less (ii) time value of financial options and guarantees, less (iii) cost of holding required capital, less (iv) allowance for non-financial risks. The breakdown by item is as follows: March 31, 2010 September 30, Increase 2010 (Decrease) Value of in-force business 972.8 90.7 (882.0) Certainty equivalent present value of future (Note1) (Note2) profits 1,182.3 306.9 (875.4) Time value of financial options and guarantees (123.3) (145.2) (21.8) Cost of holding required capital (38.2) (19.8) 18.4 Allowance for non-financial risks (48.0) (51.1) (3.1) (Note 1) Effective the six months ended September 30, 2010, an adjustment regarding the surplus relief reinsurance has been made for DFL s EEV calculation. The effect of the adjustment is 42.0 billion. 6
(Note 2) The decrease in certainty equivalent present value of future profits is mainly attributed to the decline in risk-free rates. 2-1-3 Value of New Business The value of new business is the value at the time of sale, after all acquisition-related costs, of new policies (including net increase by conversion) obtained during the reporting period. The value of new business for the six months ended September 30, 2010 is as follows: Six months ended September 30, 2009 Six months ended September 30, 2010 Increase (Decrease) Year ended March 31, 2010 Value of new business 33.3 47.2 13.8 118.9 Certainty equivalent present value of future profit 63.8 51.6 (12.2) 162.7 Time value of financial options and guarantees (25.1) (1.1) 24.0 (34.1) Cost of holding required capital (3.9) (2.0) 1.9 (7.0) Allowance for non-financial risks (1.3) (1.2) 0.1 (2.6) The new business margins (the ratio of the value of new business to the present value of premium income) are as follows: Six months ended September 30, 2009 Six months ended September 30, 2010 Increase (Decrease) Year ended March 31, 2010 Value of new business 33.3 47.2 13.8 118.9 Present Value of Premium Income (Note1) 1,524.2 1,381.4 (142.8) 2,989.5 New Business Margin 2.19% 3.42% 1.23 points 3.98% (Note 1) Future premium income is discounted by the risk-free rate used for the value of new business calculation. 7
2-2 EEV by Company (1) Dai-ichi Life March 31, 2010 September 30, Increase 2010 (Decrease) EEV (Note1) 2,868.0 2,198.9 (669.1) Adjusted net worth 1,880.9 2,114.1 233.2 Total net assets (Note2) 604.6 630.0 25.3 Retained earnings in liabilities (Note3) 653.6 669.6 16.0 General reserve for possible loan losses 4.8 5.7 0.9 Unrealized gains (losses) on securities (Note4) and miscellaneous items 1,066.4 1,320.7 254.3 Unrealized gains (losses) on loans 209.3 276.9 67.5 Unrealized gains (losses) on real estate (Note5) 105.0 87.7 (17.3) Unrealized gains (losses) on liabilities (Note6) (19.7) (20.9) (1.2) Unfunded retirement benefit obligation (Note7) (28.5) (24.6) 3.8 Tax effect equivalent of above items (714.9) (831.1) (116.1) Value of in-force business 987.1 84.7 (902.4) Certainty equivalent present value of future profits 1,141.5 252.9 (888.5) Time value of financial options and guarantees (71.4) (99.0) (27.6) Cost of holding required capital (35.9) (19.0) 16.9 Allowance for non-financial risks (47.0) (50.1) (3.0) Six months ended September 30, 2009 Six months ended September 30, 2010 Increase (Decrease) Year ended March 31, 2010 Value of new business 49.0 47.5 (1.4) 135.6 Certainty equivalent present value of future profits 52.7 51.9 (0.8) 143.6 Time value of financial options and guarantees (0.7) (1.1) (0.3) (1.5) Cost of holding required capital (2.0) (2.0) 0.0 (4.5) Allowance for non-financial risks (0.9) (1.1) (0.2) (1.8) (Note 1) Dai-ichi Life s share of DFL is valued on a book value basis. The EEV of the Group is adjusted for consolidation. (Note 2) Total of valuation and translation adjustments and expected disbursements from capital outside the company are excluded. Expected shareholder dividends as of March 31, 2010 is not included in expected disbursements from capital outside the company. (Note 3) The sum of reserve for price fluctuations, contingency reserves, and the unallocated portion of reserve for policyholder dividends is reported. (Note 4) For purposes of EEV calculations, domestic listed stocks are recorded at their market value as of the end of the reporting period, whereas for accounting purposes under Japanese GAAP, they are recorded on the 8
balance sheet at their average value during the last month of the reporting period. The difference (the value for purposes of EEV calculations less the value recorded on our balance sheet) (after tax) is 85.2 billion as of March 31, 2010, and ( 16.0) billion as of September 30, 2010. (Note 5) With respect to land, the difference between fair value and carrying value before revaluation is posted. (Note 6) The figure represents the unrealized gains (losses) in subordinated debt that Dai-ichi Life issued. (Note 7) The sum of unrecognized gains on plan amendments and unrecognized actuarial differences is reported. The new business margins (the ratio of the value of new business to the present value of premium income) are as follows: Six months ended September 30, 2009 Six months ended September 30, 2010 Increase (Decrease) Year ended March 31, 2010 Value of new business 49.0 47.5 (1.4) 135.6 Present Value of Premium Income (Note1) 1,052.5 1,256.9 204.4 2,265.4 New Business Margin 4.66% 3.79% (0.87 points) 5.99% (Note 1) Future premium income is discounted by the risk-free rate used for the value of new business calculation. 9
(2) Dai-ichi Frontier Life March 31, 2010 September 30, Increase 2010 (Decrease) EEV (Note1) 146.3 118.7 (27.5) Adjusted net worth 162.2 112.0 (50.2) Total net asset (Note2) (Note3) 116.2 63.3 (52.8) Retained earnings in liabilities (Note4) 44.8 45.9 1.0 General reserve for possible loan losses 0.0 0.0 0.0 Unrealized gains (losses) on securities and miscellaneous items 1.8 4.2 2.3 Unrealized gains (losses) on loans 0.0 0.0 0.0 Unrealized gains (losses) on real estate 0.0 0.0 0.0 Unrealized gains (losses) on liabilities 0.0 0.0 0.0 Unfunded retirement benefit obligation 0.0 0.0 0.0 Tax effect equivalent of above items (0.6) (1.5) (0.8) Value of in-force business (15.9) 6.7 22.6 Certainty equivalent present value of future (Note3) profits 45.4 60.0 14.6 Time value of financial options and Guarantees (57.6) (51.2) 6.4 Cost of holding required capital (2.5) (0.9) 1.6 Allowance for non-financial risks (1.1) (1.1) 0.0 Six months ended September 30, 2009 Six months ended September 30, 2010 Increase (Decrease) Year ended March 31, 2010 Value of new business (17.3) (0.3) 16.9 (18.5) Certainty equivalent present value of future profits 12.3 (0.2) (12.5) 21.3 Time value of financial options (Note5) and guarantees (27.0) 0.0 27.1 (36.2) Cost of holding required capital (2.0) 0.0 2.0 (2.8) Allowance for non-financial risks (0.5) (0.1) 0.4 (0.8) (Note 1) This table shows the full value of DFL as an independent entity. When used in the calculation of Group EEV, the value is in proportion to Dai-ichi Life s shareholding in DFL (90.0%). (Note 2) The total of valuation and translation adjustments is excluded. (Note 3) Effective the six months ended September 30, 2010, an adjustment regarding the surplus relief reinsurance has been made for DFL s EEV calculation. The effects on Total net asset and Certainty equivalent present value of future profits are ( 46.6) billion and 46.6 billion, respectively. If the same adjustment had been made as of March 31, 2010, the effects on Total net asset and Certainty equivalent present value of future profits would have been ( 46.7) billion and 46.7 billion, respectively, and the adjusted net worth and value of in-force business would have been 115.5 billion and 30.7 billion, respectively. 10
(Note 4) The sum of the reserve for price fluctuations and contingency reserve is reported. (Note 5) The decrease in time value of financial options and guarantees is attributed to the utilization of reinsurance for the minimum guarantee risk of new contracts of variable annuities. The new business margins (the ratio of the value of new business to the present value of premium income) are as follows: Six months ended September 30, 2009 Six months ended September 30, 2010 Increase (Decrease) Year ended March 31, 2010 Value of new business (17.3) (0.3) 16.9 (18.5) Present Value of Premium Income (Note1) 524.2 138.3 (385.8) 804.5 New Business Margin (3.32%) (0.29%) 3.03 points (2.31%) (Note 1) Future premium income is discounted by the risk-free rate used for the value of new business calculation. (Reference) Dai-ichi Life Insurance Company of Vietnam Dai-ichi Life Insurance Company of Vietnam, Limited (hereinafter DLVN ), a consolidated life insurance subsidiary in Vietnam, is assumed to have a limited impact on the Group EEV. Accordingly in the EEV calculation process, the Group considers the EV of DLVN calculated using traditional embedded value ( TEV ) methodology to be the fair value of Dai-ichi Life s ownership interest, which has been included in the Group s adjusted net worth. The TEV of DLVN as of June 30 is as follows: December 31, 2009 June 30, 2010 Increase (Decrease) TEV 6.1 5.8 (0.3) Adjusted net worth 5.1 4.8 (0.2) Value of in-force business 1.0 0.9 0.0 (Note 1) The closing date of DLVN is 30 June, whereas that of Dai-ichi Life and DFL is 30 September. In calculating the Group EEV, the TEV of DLVN as of the most recent closing date is used. (Note 2) The figures were converted into yen at the prevailing exchange rate on the final day in each period (1VND = 0.0050 yen as of December 31, 2009 and 1VND = 0.0046 yen as of June 30, 2010). The Group intends to consider the future adoption of EEV-based reporting by its overseas subsidiaries depending on their materiality. 11
3. Movement Analysis 3-1 Movement Analysis of Group EEV Adjusted net Value of in-force EEV worth business Values as of March 31, 2010 1,863.5 972.8 2,836.3 (1) Adjustments to the values as of March 31, 2010 (52.0) 42.0 (10.0) Adjusted values as of March 31, 2010 1,811.4 1,014.8 2,826.3 (2) Value of new business (3) Expected existing business contribution (risk-free rate) (4) Expected existing business contribution (in excess of risk-free rate) (5) Expected transfer from VIF to adjusted net worth 0.0 (2.7) 8.5 11.2 47.2 5.7 164.5 (11.2) 47.2 3.0 173.1 0.0 on in-force at beginning of year 96.8 (96.8) 0.0 on new business (85.6) 85.6 0.0 (6) Non-economic experience variances (7) Non-economic assumptions changes 7.6 0.0 0.1 0.5 7.7 0.5 (8) Economic variances 215.3 (1,130.9) (915.5) Values as of September 30, 2010 2,051.6 90.7 2,142.3 (1) Adjustments to the values as of March 31, 2010 Adjusted net worth of Dai-ichi Life decreased by 10.0 billion, as it paid out shareholder dividends during the six month ended September 30, 2010. DFL reduces the risk of failing to recover the initial cost related to new business by a surplus relief reinsurance (Note). Effective the six months ended September 30, 2010, an adjustment regarding the surplus relief reinsurance has been made for DFL s EEV calculation. The adjustment does not affect the total EEV amount, because it is a reclassification of the future cost for the reinsurance from value of in-force business (VIF) to adjusted net worth (ANW). The effects on DFL s ANW and VIF are ( 46.6) billion and 46.6 billion, respectively. The effects on Group s ANW and VIF are ( 42.0) billion and 42.0 billion, respectively, in proportion to Dai-ichi Life s shareholding in DFL (90.0%). (Note) Under current statutory accounting practices applicable to life insurance companies in Japan, the initial cost is recognized at the time of sale, and the profit is collected gradually over the contract period. Because the ability of an insurance company to recover the initial cost is subject to the future economic environment, DFL reduces the risk of failing to recover the cost by a surplus relief reinsurance. DFL receives commission to cover the initial cost at the time of sale, and the commission is amortized over the the contract period. As a result, DFL can reduce the capital cost of new 12
business. In past disclosures, the commission was reported in ANW and the future cost for reinsurance was regarded as a part of VIF. However, we have decided to reclassify the future cost for reinsurance from VIF to ANW in this and future disclosures, because the reclassification more appropriately expresses VIF and ANW. (2) Value of new business The value of new business represents the value at the time of sale, after all acquisition-related costs, attributable to new business obtained during the six months ended September 30, 2010. (3) Expected existing business contribution (risk-free rate) In calculating EEV, future expected returns are discounted back using risk-free rates. Thus, the discounted value is assumed to earn the expected return over time. Moreover, this item includes the release for the six months ended September 30, 2010 of time value of financial options and guarantees, cost of holding required capital and allowance for non-financial risks. Dai-ichi Frontier Life utilizes derivative transactions to reduce minimum guarantee risks of variable annuities. Effective the six months ended September 30, 2010, the expected profit/loss over time derived from such transactions is included in this item, taking into account the materiality of such transactions. (4) Expected existing business contribution (in excess of risk-free rate) Rates of future expected returns are assumed to be risk-free rates in calculating EEV. However, the Group holds (and will hold) risky assets and expects higher rates of returns on these assets than the risk-free rates. In calculating this item, the Group uses the expected rates of returns described in Appendix B. Effective the six months ended September 30, 2010, this item includes the expected profit/loss derived from derivative transactions for reducing minimum guarantee risks of variable annuities by Dai-ichi Frontier Life, taking the importance of such transactions into account. (5) Expected transfer from VIF(value of in-force business) to adjusted net worth The total expected profit during six months on a statutory accounting basis is transferred to the adjusted net worth. This item includes both the profit expected to emerge from business in force at the start of the reporting period, as well as the expected emergence in adjusted net worth during the six months of statutory losses, including the impact of acquisition costs, and a corresponding increase in the value of in-force business, arising from the new business issued in the six months. Note that the transferred amounts do not affect the total amount of Group EEV. 13
(6) Non-economic experience variances This item represents the difference between (i) the non-economic assumptions, which were used for calculating EEV as of March 31, 2010 and (ii) the actual experience during the six months ended September 30, 2010 corresponding to such assumptions. (7) Non-economic assumptions changes This item quantifies the amount of change attributable to increase/decrease in future profits/losses after September 30, 2010 due to changes made to the assumptions. (8) Economic variances This item represents the impact of actual to assumed differences in economic assumptions, such as market interest rate and implied volatilities. This item includes the effects on future estimated differences attributable to changes in assumptions. The main factor in the variances is the decrease in value of in-force business due to the decline in interest rates. 14
3-2 Movement Analysis by Company (1) Dai-ichi Life Adjusted net Value of in-force EEV worth business Values as of March 31, 2010 1,880.9 987.1 2,868.0 Adjustments to the values as of March 31, 2010 (10.0) 0.0 (10.0) Adjusted values as of March 31, 2010 1,870.9 987.1 2,858.0 Value of new business Expected existing business contribution (risk-free rate) Expected existing business contribution (in excess of risk-free rate) Expected transfer from VIF to adjusted net worth on in-force at beginning of year on new business Non-economic experience variances Non-economic assumptions changes 0.0 0.5 11.6 (1.7) 80.1 (81.9) 7.8 0.0 47.5 2.0 153.3 1.7 (80.1) 81.9 0.2 0.0 47.5 2.6 165.0 Economic variances 225.0 (1,107.4) (882.3) Values as of September 30, 2010 2,114.1 84.7 2,198.9 0.0 0.0 0.0 8.0 0.0 (2) Dai-ichi Frontier Life Adjusted net Value of in-force EEV worth business Values as of March 31, 2010 162.2 (15.9) 146.3 Adjustments to the values as of March 31, 2010 (46.7) 46.7 0.0 Adjusted values as of March 31, 2010 115.5 30.7 146.3 Value of new business Expected existing business contribution (risk-free rate) Expected existing business contribution (in excess of risk-free rate) Expected transfer from VIF to adjusted net worth on in-force at beginning of year on new business Non-economic experience variances Non-economic assumptions changes 0.0 (3.6) (3.4) 14.4 18.5 (4.0) (0.1) 0.0 (0.3) 4.0 12.4 (14.4) (18.5) Economic variances (10.7) (26.0) (36.8) Values as of September 30, 2010 112.0 6.7 118.7 4.0 (0.1) 0.5 (0.3) 0.4 9.0 0.0 0.0 0.0 (0.2) 0.5 15
4. Sensitivity Analysis 4-1 Sensitivity Analysis of Group EEV The following table shows a sensitivity analysis of Group EEV to changes in assumptions. Although each figure in the table indicates the sensitivity in response to a change in one parameter, it should be noted that the sum of two or more figures in the table do not indicate the sensitivity to a change in two or more parameters corresponding to such figures. The sensitivities are calculated based on the assumption that the Group s management actions would remain unaffected by changes in parameters. Assumptions EEV Increase (decrease) Values as of September 30, 2010 2,142.3 - Sensitivity 1: 50bp upward parallel shift in risk-free yield curve 2,547.7 405.3 Sensitivity 2: 50bp downward parallel shift in risk-free yield curve 1,664.3 (478.0) Sensitivity 3: 10% decline in equity and real estate values 1,864.2 (278.1) Sensitivity 4: 10% decline in maintenance expenses 2,288.3 145.9 Sensitivity 5: 10% decline in surrender and lapse rate 2,262.2 119.9 Sensitivity 6: 5% decline in mortality and morbidity rates for life insurance products Sensitivity 7: 5% decline in mortality and morbidity rates for annuities 2,264.7 122.3 2,133.6 (8.7) Sensitivity 8: Setting required capital at statutory minimum level 2,162.0 19.6 Sensitivity 9: 25% increase in implied volatilities of equity and real estate values 2,108.6 (33.7) Sensitivity 10: 25% increase in implied volatilities of swaptions 2,132.0 (10.3) The sensitivities in the above table show the effect on the total EEV but only the Group s value of in-force business is affected in sensitivities 4 through 10. The following table shows the effect on the Group s adjusted net worth of sensitivities 1 through 3. Increase (decrease) Sensitivity 1: 50bp upward parallel shift in risk-free yield curve (685.2) Sensitivity 2: 50bp downward parallel shift in risk-free yield curve 605.1 Sensitivity 3: 10% decline in equity and real estate values (289.0) 16
Sensitivity analysis of the Group s value of new business Value of new Increase Assumptions business (decrease) Values as of September 30, 2010 47.2 - Sensitivity 1: 50bp upward parallel shift in risk-free yield curve 64.7 17.5 Sensitivity 2: 50bp downward parallel shift in risk-free yield curve 28.6 (18.5) Sensitivity 3: 10% decline in equity and real estate values 47.3 0.0 Sensitivity 4: 10% decline in maintenance expenses 53.0 5.7 Sensitivity 5: 10% decline in surrender and lapse rate 58.6 11.3 Sensitivity 6: 5% decline in mortality and morbidity rates for life insurance products Sensitivity 7: 5% decline in mortality and morbidity rates for annuities 49.3 2.1 47.2 0.0 Sensitivity 8: Setting required capital at statutory minimum level 49.2 2.0 Sensitivity 9: 25% increase in implied volatilities of equity and real estate values 46.9 (0.3) Sensitivity 10: 25% increase in implied volatilities of swaptions 47.1 0.0 Sensitivity 1 The item represents the effect on EEV of an upward parallel shift of 50bp in the yield curve of risk-free forward rates. As prices of bonds and loans change, the adjusted net worth changes. Also, as future expected investment yields change, the value of in-force business changes. In accordance with the EEV principles, life insurers are required to disclose their EEV sensitivities to a 100bp shift in the yield curve. However, taking into consideration the low level of interest rates in Japan, we disclosed our sensitivities to a 50bp shift in the yield curve. Sensitivity 2 The item represents the effect on EEV of a downward parallel shift of 50bp in the yield curve of risk-free forward rates. The lower limit of the risk-free forward rates is assumed to be zero. 17
Sensitivity 3 This item shows the effect on EEV of a decline of 10% in equity and real estate values. Adjusted net worth would be directly affected by the decline. On the other hand, the value of in-force business would also be affected by the decline, as the decline would affect the economic assumption. Sensitivity 4 The item represents the effect on EEV of a decrease of 10% in estimated maintenance expenses associated with maintaining in-force business. Sensitivity 5 The item represents the effect on EEV of a decrease of 10% in surrender and lapse rates. Sensitivity 6 The item represents the effect on EEV of a decrease of 5% in mortality and morbidity rates for life and medical insurance products. Sensitivity 7 The item represents the effect on EEV of a decrease of 5% in mortality and morbidity rates for annuities. Sensitivity 8 The item represents the effect on EEV in the event that required capital was changed to the statutory minimum level, a solvency margin ratio of 200%. As items such as policy reserves in excess of surrender values are regarded as admissible assets in the Japanese solvency margin requirement, the cost of holding required capital is not proportional to the level of capital, and the cost to satisfy the statutory minimum level can be nil. Sensitivity 9 The item represents the effect on EEV of an increase of 25% in the implied volatilities of equity and real estate values. This is because the value of in-force business should change as the time value of financial options and guarantees changes. Sensitivity 10 The item represents the effect on EEV of an increase of 25% in the implied volatilities of swaptions. This is because the value of in-force business should change as the time value of financial options and guarantees changes. 18
4-2 Sensitivity Analysis by Company (1) Dai-ichi Life Assumptions EEV Increase (decrease) Values as of September 30, 2010 2,198.9 - Sensitivity 1: 50bp upward parallel shift in risk-free yield curve 2,594.9 396.0 Sensitivity 2: 50bp downward parallel shift in risk-free yield curve 1,728.2 (470.6) Sensitivity 3: 10% decline in equity and real estate values 1,920.4 (278.4) Sensitivity 4: 10% decline in maintenance expenses 2,343.8 144.8 Sensitivity 5: 10% decline in surrender and lapse rate 2,321.2 122.3 Sensitivity 6: 5% decline in mortality and morbidity rates for life insurance products Sensitivity 7: 5% decline in mortality and morbidity rates for annuities 2,321.2 122.3 2,190.1 (8.7) Sensitivity 8: Setting required capital at statutory minimum level 2,217.9 19.0 Sensitivity 9: 25% increase in implied volatilities of equity and real estate values 2,184.8 (14.0) Sensitivity 10: 25% increase in implied volatilities of swaptions 2,187.5 (11.4) The sensitivities in the above table show the effect on the total EEV but only Dai-ichi Life s value of in-force business is affected in sensitivities 4 through 10. The following table shows the effect on the adjusted net worth of sensitivities 1 through 3. Increase (decrease) Sensitivity 1: 50bp upward parallel shift in risk-free yield curve (677.2) Sensitivity 2: 50bp downward parallel shift in risk-free yield curve 595.9 Sensitivity 3: 10% decline in equity and real estate values (280.4) 19
Sensitivity analysis of Dai-ichi Life s value of new business Value of new business Increase (decrease) Values as of September 30, 2010 47.5 - Sensitivity 1: 50bp upward parallel shift in risk-free yield curve 65.0 17.4 Sensitivity 2: 50bp downward parallel shift in risk-free yield curve 29.0 (18.5) Sensitivity 3: 10% decline in equity and real estate values 47.7 0.1 Sensitivity 4: 10% decline in maintenance expenses 53.2 5.6 Sensitivity 5: 10% decline in surrender and lapse rate 58.9 11.4 Sensitivity 6: 5% decline in mortality and morbidity rates for life insurance products Sensitivity 7: 5% decline in mortality and morbidity rates for annuities 49.7 2.1 47.5 0.0 Sensitivity 8: Setting required capital at statutory minimum level 49.6 2.0 Sensitivity 9: 25% increase in implied volatilities of equity and real estate values 47.2 (0.3) Sensitivity 10: 25% increase in implied volatilities of swaptions 47.5 0.0 20
(2) Dai-ichi Frontier Life EEV Increase (decrease) Values as of September 30, 2010 118.7 - Sensitivity 1: 50bp upward parallel shift in risk-free yield curve 129.0 10.3 Sensitivity 2: 50bp downward parallel shift in risk-free yield curve 110.5 (8.2) Sensitivity 3: 10% decline in equity and real estate values 119.1 0.3 Sensitivity 4: 10% decline in maintenance expenses 119.9 1.1 Sensitivity 5: 10% decline in surrender and lapse rate 116.0 (2.7) Sensitivity 6: 5% decline in mortality and morbidity rates for life insurance products Sensitivity 7: 5% decline in mortality and morbidity rates for annuities 118.7 0.0 118.8 0.0 Sensitivity 8: Setting required capital at statutory minimum level 119.5 0.7 Sensitivity 9: 25% increase in implied volatilities of equity and real estate values 96.8 (21.9) Sensitivity 10: 25% increase in implied volatilities of swaptions 119.9 1.2 The sensitivities in the above table show the effect on the total EEV but only Dai-ichi Frontier Life s value of in-force business is affected in sensitivities 4 through 10. The following table shows the effect on the adjusted net worth of sensitivities 1 through 3. Increase (decrease) Sensitivity 1: 50bp upward parallel shift in risk-free yield curve (8.8) Sensitivity 2: 50bp downward parallel shift in risk-free yield curve 10.1 Sensitivity 3: 10% decline in equity and real estate values (9.5) 21
Sensitivity analysis of Dai-ichi Frontier Life s value of new business Value of new Increase business (decrease) Values as of September 30, 2010 (0.3) Sensitivity 1: 50bp upward parallel shift in risk-free yield curve (0.2) 0.1 Sensitivity 2: 50bp downward parallel shift in risk-free yield curve (0.4) 0.0 Sensitivity 3: 10% decline in equity and real estate values (0.4) 0.0 Sensitivity 4: 10% decline in maintenance expenses (0.2) 0.1 Sensitivity 5: 10% decline in surrender and lapse rate (0.4) 0.0 Sensitivity 6: 5% decline in mortality and morbidity rates for life insurance products Sensitivity 7: 5% decline in mortality and morbidity rates for annuities (0.3) 0.0 (0.3) 0.0 Sensitivity 8: Setting required capital at statutory minimum level (0.3) 0.0 Sensitivity 9: 25% increase in implied volatilities of equity and real estate values (0.3) 0.0 Sensitivity 10: 25% increase in implied volatilities of swaptions (0.3) 0.0 5. Note on Using EV In calculating the embedded value of the Group, numerous assumptions (some of which are shown in Appendix B) are required concerning the Group's lines of business with respect to industry performance, business and economic conditions and other factors, many of which are outside the Group s control. Although the assumptions used represent estimates that the Group believe are appropriate for the purpose of embedded value reporting, future operating conditions may differ, perhaps significantly, from those assumed in the calculation of the embedded value. Consequently, the inclusion of embedded value herein should not be regarded as a statement by the Group, Towers Watson or any other entity, that the stream of future after-tax profits discounted to produce the embedded value will be achieved. 22
Appendix A: EEV Methodology The methodology and assumptions adopted by the Group to calculate EEV are market-consistent and in accordance with the EEV Principles and related guidance issued by the CFO Forum in May 2004 and further EEV guidance on minimum required disclosures of sensitivities and other items issued by the Forum in October 2005. 1. Covered Business The covered business represents all of the life insurance business of the Group (all the businesses and subsidiaries are covered in the EEV calculations). 2. Adjusted Net Worth Adjusted net worth is calculated by adjusting the total net assets on the company s balance sheet for the following: - Expected disbursements from capital outside the company are excluded from the adjusted net worth. - In order to mark to market, differences in market value and book value of assets have been reflected, specifically differences of bonds held to maturity, policy-reserve-matching bonds, loans, land, building, debt and borrowings etc., after adjusting for unrealized gains/losses after tax. For retirement benefits, the sum of unrecognized gains on plan amendments and unrecognized actuarial differences has been used after adjustment for tax. - Consolidated subsidiaries/affiliated companies operating life insurance businesses are treated as follows: - Dai-ichi Frontier Life EEV of the company is calculated and included in the Group s EEV. - Dai-ichi Life Insurance Company of Vietnam, Limited As the company has a limited impact on Group EEV, its TEV is included in the Group s adjusted net worth as the fair value of Dai-ichi Life s ownership interest. - Affiliated companies accounted for under the equity method EEV is not calculated, and differences in market value and book value of assets have been reflected as unrealized gains (losses) in adjusted net worth. - Liabilities that are appropriate to be added to the adjusted net worth (contingency reserve, reserve for price fluctuations, unallocated portion of reserve for policyholder dividends, and general reserve for possible loan losses) have been added on an after-tax basis. - Effective the six months ended September 30, 2010, adjusted net worth of DFL is shown after the adjustment regarding the surplus relief reinsurance. 23
3. Value of in-force business The value of in-force business is calculated as the certainty equivalent present value of projected after-tax profits deducting the time value of financial options and guarantees, cost of holding required capital and allowance for non financial risks. Future profits for each year are estimated based on the assumption that policy reserves are held on a statutory basis. There are no projected residual assets at the end of the projection period. With regard to reinsurance, both reinsured and reinsuring parts are reflected. 4. Certainty equivalent present value of future profits The certainty equivalent present value of future profits is the present value of after-tax profits based on the projected cash flows, calculated on a deterministic basis. All cash flows are discounted at the risk-free rate, assuming the investment yield of all assets is equivalent to the risk-free rate. The certainty equivalent present value of future profits reflects the intrinsic value of options and guarantees. 5. Time value of financial options and guarantees The time value of financial options and guarantees is calculated as the difference between (i) the average of the present value of future after-tax profits calculated by stochastic methods where economic assumptions are consistent with current market prices for traded assets, and (ii) the certainty equivalent present value of future profits. Asset allocation is assumed to be the same as the one at the valuation date over the projection periods and any discretion of management in terms of investment strategy is not incorporated. There are various options in the insurance contracts. The following options and guarantees are considered in calculating the time value of financial options and guarantees of the Group using stochastic methods. - Participating policies options When profits arise, policyholder dividends are paid out. On the other hand, when losses arise, the cost of guarantees is not attributed to policyholders. Such asymmetric nature emerges in the net surplus after distribution of policyholder dividends. The value of this option is calculated in the time value of financial options and guarantees by assuming future policyholder dividends along with future profits by stochastic scenarios. - Minimum guarantees for variable life insurance When investment performance is good, policyholders will be entitled to the full amount of the account. On the other hand, when investment performance is poor, an insurance company will bear the cost of guarantees attached to variable life 24
insurance policies. The value of this option is calculated in the time value of financial options and guarantees of the Group - Minimum interest-rate guarantee for interest rate-sensitive products When interest rates rise, high interest rates are credited to interest rate-sensitive products. On the other hand, even when interest rates decline, the minimum interest rate is guaranteed in some cases. Such asymmetric nature emerges in future cash flows. The value of this option is calculated in the time value of financial options and guarantees of the Group - Policyholder behavior Policyholders have options depending on the movement of financial markets. The cost of selective lapses, such as the lapses based on the moneyness in variable annuities or the relation between assumed interest rate and interest rate in saving products, is reflected in the time value of financial options and guarantees of the Group. 6. Cost of holding required capital This is referred to as frictional cost in market-consistent methodology. In order to secure financial solidity, life insurance companies are required to hold additional assets in excess of the statutory liability. The cost of holding required capital is the cost incurred through the payment of taxes on the investment income of the assets backing the required capital and the related investment expenses incurred for the management of the assets. The EEV Principles define the minimum required capital to be equal to the statutory minimum capital requirement, and if the required capital calculated by an internal model exceeds the statutory requirement, an internal model may be used. The Group defines required capital as the level required to maintain 600% level of solvency margin ratio. The values of required capital as of March 31, 2010 and September 30, 2010 are 913.5 billion and 791.8 billion, respectively (free surplus as of March 31, 2010 and September 30, 2010 are 950.0 billion and 1,259.7 billion, respectively). MCEV Principles define required capital as the amount of assets, which is calculated by an internal model and should be held in addition to the assets corresponding to the statutory liability. The Group will continue investigation in reviewing the definition of required capital, taking into account worldwide trends and discussions on economic value based solvency assessment. 7. Allowance for non-financial risks EEV Principles define the EV to be the present value of distributable profits 25
attributable to shareholders arising from assets allocated to the covered business, calculated taking into account all the risks of the covered business including non financial-risks. The uncertainty around the return on most non-financial risks can be diversified away. Thus, provided the best estimate assumptions are set to provide the mean expected financial outcome to shareholders, no further allowance for non-financial risk such as mortality is required. There are some non-financial risks where the existing best estimate experience assumptions do not reflect the mean expected financial outcome to shareholders. These are typically operational risks. When profits arise, the company pays tax. On the other hand, when losses arise, tax can not be negative. In such cases, carrying losses on a tax accounting basis are collectable in most cases. However, there is a risk of uncollectibility within in the deferrable period. The Group quantified non-financial risks by a simplified model. 8. Value of new business The value of new business for the six months ended September 30, 2010 is the value of new policies issued during the six month period, and is calculated by the same method as the value of in-force business. The value of new business is the value at the time of sale of new policies. The profit during the six months ended September 30, 2010 from new business is calculated based on the same assumptions used for the value of in-force business. The value of new business is calculated at the end of the 1 st half of the fiscal year, based on economic and non-economic assumptions as of the end of the 1 st half of the fiscal year. In addition to the new policies, net increases in conversions and addition of riders have been included in the value of new business, while renewal of policies is not included. With regard to the corporate insurance, such as group insurance, corporate pension and workers compensation insurance, the increase of the proportion underwritten by an insurance company in a group scheme, the increase of members in a group scheme and the increase of the sum insured by members in a group scheme are included. This definition of the new business is consistent with statutory financial reporting except for the corporate insurance. 26
Appendix B: Principal EEV Assumptions 1. Economic assumptions (1) Risk-free rate In the certainty equivalent calculation, the Japanese Government Bond (JGB) is used as a proxy for risk-free rates, taking assets in the Group s portfolio and the liquidity in the market into account. Issues such as the proxy for risk-free rates, liquidity premium and extrapolation beyond the last liquid data point, are discussed broadly, for example, in the 5 th Quantitative Impact Study (QIS5) of European Solvency II, CRO Forum and so on. For extrapolation under QIS5 technical specification purposes, term structures of interest rates for various currencies are set based on a method using the ultimate forward rate. We have also been studying extrapolation models for risk-free rates due to the low liquidity of ultralong-term bonds in the market beyond a 30 year maturity, for which no standard model exists. In the past, we assumed that forward rates in the 31st year and beyond were equal to the JGB rate observed in the 30th year. For EEV reporting as of September 30, 2010 we have made some changes to the method used for setting the forward risk-free rates from the 31st year. The table below shows, for selected terms, the risk-free rates (spot rates) which are used in the calculations. Term March 31, 2010 September 30, 2010 1 Year 2 Year 3 Year 4 Year 5 Year 10 Year 15 Year 20 Year 25Year 30Year 35Year 40Year 45Year 50Year 0.108% 0.157% 0.289% 0.416% 0.575% 1.454% 2.024% 2.338% 2.418% 2.444% 2.464% 2.478% 2.489% 2.498% 0.111% 0.134% 0.146% 0.208% 0.258% 1.002% 1.532% 1.841% 1.943% 1.954% 1.963% 1.993% 2.026% 2.073% (Source: Bloomberg, after interpolation/extrapolation) 27
(2) Principal dynamic assumption i. Interest rate model As an interest rate model, the Group has adopted a single-factor Hull-White model, in which interest rates associated with Japanese yen, U.S. dollars, Euro and British pounds are calculated. The model has been adjusted to be in line with a risk-neutral approach in which Japanese yen is set as a base currency, and correlations between the interest rates have been also taken into account. The interest rate model has been calibrated consistently with the market environment as of each reporting date, and parameters used are estimated from the yield curve and implied volatilities of interest rate swaptions with various maturities. 5,000 scenarios are used in calculating time value of financial options and guarantees through stochastic method. These scenarios have been generated by Towers Watson. Summary of implied volatilities of interest rate swaptions used to calibrate the scenarios are as follows: Interest rate swaptions March 31, 2010 September 30, 2010 Option Swap Term Term JPY USD EUR GBP JPY USD EUR GBP 5Year 5Year 27.3% 21.0% 16.4% 14.9% 33.0% 27.8% 23.7% 17.5% 5Year 7Year 25.2% 20.2% 16.0% 14.3% 31.2% 26.9% 23.1% 16.6% 5Year 10Year 23.6% 19.2% 15.9% 13.5% 28.8% 25.9% 23.1% 15.7% 7Year 5Year 23.1% 19.1% 14.6% 13.1% 28.4% 25.4% 20.9% 14.6% 7Year 7Year 22.2% 18.4% 14.6% 12.7% 27.4% 24.8% 20.8% 14.2% 7Year 10Year 21.6% 17.8% 14.9% 12.5% 26.2% 24.2% 21.2% 14.1% 10Year 5Year 20.9% 16.6% 13.6% 11.6% 26.0% 23.3% 19.2% 12.8% 10Year 7Year 20.7% 16.3% 13.8% 11.5% 25.4% 22.9% 19.4% 13.0% 10Year 10Year 20.6% 16.0% 14.4% 11.7% 24.8% 22.6% 20.1% 12.8% (Source: Bloomberg) 28
ii. Implied volatilities of equities and currencies Volatilities of traditional equity indices and currencies are calibrated based on implied volatilities of relevant options traded in the market. Implied volatilities used to calibrate the scenarios are as follows: Stock Options Currency Underlying Asset JPY Nikkei 225 3Year Option Volatility Term March 31, 2010 September 30, 2010 4Year 5Year USD S&P 500 3Year 4Year 5Year EUR EuroStoxx 50 3Year 4Year 5Year GBP FTSE 100 3Year 4Year 5Year 21.5% 21.9% 22.1% 21.2% 22.5% 23.6% 21.7% 21.9% 22.3% 19.9% 20.2% 20.5% 24.7% 25.1% 25.5% 26.1% 26.7% 27.4% 24.6% 24.7% 25.1% 22.8% 23.2% 23.6% (Source: Investment Bank) Currency Options Currency Option Volatility Term March 31, 2010 September 30, 2010 USD EUR GBP 10Year 10Year 10Year 18.1% 20.3% 17.5% 17.7% 23.5% 22.2% (Source: Bloomberg) iii. Volatilities of real estate and other asset classes Market-consistent implied volatilities have not been observed with regard to real estate. Therefore, the volatility of real estate has been derived by multiplying the historical volatility ratio(111.7%) of Tokyo Stock Exchange REIT index to TOPIX (Tokyo Stock Exchange Stock Price Index) by the implied volatility of Japanese equity. In addition, foreign real estate and emerging equity/bond markets are modeled as an asset class in stochastic calculation for variable type products. Volatilities of those asset classes have been derived in the same manner. 29